The U.S. dollar strengthened across the board on Wednesday, driven by quarter-end flows, rising U.S. Treasury yields, and increased risk aversion amid falling oil prices and escalating geopolitical tensions. The dollar index rose 0.4%, benefiting from short-covering, helping to reduce losses for the month. Slumping demand in China and rising U.S. oil inventories contributed to declining oil prices, while geopolitical concerns, particularly Russian President Vladimir Putin’s remarks on potential nuclear retaliation, heightened the risk-off sentiment.

U.S. Treasury Yields Edge Higher, Supporting Dollar Strength

Yields on U.S. Treasuries increased by 2-4 basis points, with the yield curve steepening, providing further support for the greenback. Rising yields, coupled with geopolitical concerns, bolstered safe-haven demand for the U.S. dollar.

Key Risk Events on the Horizon: Swiss Rate Decision and U.S. PCE Data

Market Focus Shifts to Central Banks and Inflation Data

Looking ahead, investors are eyeing several critical risk events, including the Swiss National Bank's (SNB) rate decision, where a possible rate cut could weaken the Swiss franc further. In the U.S., key economic releases, including Friday’s Personal Consumption Expenditures (PCE) inflation data, are expected to influence future Federal Reserve policy decisions. Geopolitical tensions in Russia and the Middle East, along with uncertainties about China’s economic demand, continue to drive caution in risk assets, with potential downward pressure on commodity prices.

OECD’s Growth Outlook Offers Some Support, But Risks Remain

Although the OECD slightly improved its global growth outlook, the immediate market focus remains on central bank actions and inflation data. The cautious sentiment is likely to persist amid ongoing geopolitical uncertainties.

Currency Market Movements: Euro Retreats, Swiss Franc Weakened

Euro Pulls Back as U.S. Yields Rise, Swiss Franc Under Pressure

The euro retreated from its 14-month high as rising U.S. yields limited further gains, and option flows added resistance. The Swiss franc weakened amid speculation about an SNB rate cut, while the Japanese yen saw strong option demand ahead of key leadership elections in Japan.

Yuan Under Pressure, Pound and Aussie Dollar Fall

The Chinese yuan remained under pressure, with USD/CNH failing to hold below 7.00 as optimism over the People’s Bank of China’s stimulus faded. The British pound fell sharply as risk aversion deepened and the dollar strengthened broadly. Commodity-linked currencies, such as the Australian dollar, also declined as WTI crude oil fell nearly 3% on concerns over China’s economic outlook.

Outlook: Dollar Strength Expected to Continue

Safe-Haven Demand and U.S. Yields to Support Dollar

Looking ahead, the dollar is expected to maintain its strength, supported by firm U.S. yields and safe-haven demand amid ongoing geopolitical risks. The Swiss franc could weaken further if the SNB signals a dovish stance or cuts rates, while the yen may experience volatility due to political uncertainty in Japan. The euro’s rally may stall unless U.S. yields stabilize, and Friday’s PCE inflation data could significantly influence expectations for Fed policy. Commodity currencies, such as the Australian dollar, could remain under pressure if oil and metal prices continue to struggle amid doubts about China’s economic demand. Overall, the outlook favors continued dollar strength unless there are surprises in key data or geopolitical developments.